The continuing hostility of the IRS bureaucracy toward offers in compromise, and the recent decision of the Congress to severely restrict the availability and usefulness of bankruptcy may combine to place more emphasis on installment agreements. But some taxpayers, particularly those with large tax debts involving multiple tax years, may find that they can’t meet the requirements of the traditional installment agreement. This is because installment agreements are required to pay off the liabilities for all tax periods within the remaining life of the collection statute of limitations plus five years. Thus, some taxpayers may be unable to resolve their tax debts through an offer in compromise, bankruptcy or even a traditional installment agreement. What then? For such taxpayers, the best answer may be a relatively new hybrid arrangement called an installment agreement on specific balance due accounts,” or more informally, a “part pay” installment agreement.
In general, an installment agreement permits the taxpayer to resolve his or her outstanding tax debt through monthly payments, free of the threat of levies and other enforced collection action. The distinguishing feature of the part pay installment agreement is that it covers those specific tax periods that can be paid in full during the remaining life of the statute of limitations plus five years, while those tax periods that cannot be paid are posted “currently not collectible” and allowed to expire. This is a result in some ways analogous to a deferred payment offer in compromise, in which monthly payments are made to the IRS over the remaining life of the statute of limitations on collection.
A part pay installment agreement is more flexible than a deferred payment offer in the sense that changes to the monthly payment amount are permitted and easy to accomplish if the taxpayer’s ability to pay changes. With a deferred payment offer, the monthly payment amount is fixed as part of the compromise contract, and it is difficult to change the payment amount to accommodate changed circumstances. This “flexibility” can be a blessing or a curse, depending on whether the client’s financial circumstances deteriorate or improve. If they improve, the IRS may demand larger monthly payments under the installment agreement. Conversely, a taxpayer with a deferred payment offer who suffers a reduction in income may find himself unable to make the required monthly payments, but with little ability to change the terms of the compromise agreement other than defaulting and starting the offer negotiation process all over again. In contrast, under those circumstances, the payments under the part pay installment agreement can be adjusted downward to accomodate the taxpayer’s reduced ability to pay.
Section 6159(a) of the Internal Revenue Code provides that installment agreements must pay the subject liabilities in full within the statute of limitations. And while ‘ 6159(a)(2)(A) provides that the statute may be extended in connection with the granting of an installment agreement, the Service’s current policy is that such statute extensions are limited to five years. (An extension for a total of six years can be requested by the Service if such longer extension appears to be necessary to make sure that the tax is full paid before the statute expiration date despite skipped payments, changes in interest rates, defaults, and reinstatements.) An extension of the collection statute of limitations entered into in connection with the implementation of an installment agreement is memorialized using IRS Form 900 Tax Collection Waiver.
As with other installment agreements (with the exception of special streamlined, guaranteed, or business trust fund express agreements), a part pay installment agreement will be allowed only if the taxpayer first borrows against or liquidates all available nonexempt assets so that the resulting funds can be used to pay down the liabilities. But if after exhausting such efforts the taxes are still unpaid, a part pay installment agreement will be considered if the taxpayer’s ability to pay would allow one or more of the balance due accounts to be paid in full, even though not all open accounts could be paid.
In selecting the specific balance due accounts to be covered by the part pay installment agreement, the Service’s policy is to start with the account with the earliest collection statute expiration date (or CSED), with extensions, that can be full paid. Then the subsequent periods are considered in order of their CSEDs, and any that can be full paid are added to the list. If the liability for any period is too large to be paid, it is skipped. This ordering is merely a guideline, however, and a group manager can approve a different method of selecting the periods to be included in the agreement if it would result in a larger total collection.
The tax periods that are not included in the part pay installment agreement, based on the application of the taxpayer’s ability to pay as outlined above, are posted “currently not collectible.” As such, they are subject to reactivation on subsequent financial review. Furthermore, they are subject to the systemic state income tax levy program, meaning that the IRS will notify the tax authorities in the taxpayer’s state to intercept any state tax refunds and send the money to the IRS for application to these “currently not collectible” periods.
In general, part pay installment agreements are reviewed annually. If it is determined by the Service’s internal review that there may have been a change in the taxpayer’s financial circumstances, the case is assigned out to the field. The taxpayer is informed of this by the issuance of a CP 522 notice. A new Form 433-A Collection Information Statement will then be requested so that the Service can determine whether any of the accounts posted currently not collectible could now be paid. If it appears that this is possible, the terms of the agreement are modified unilaterally by the IRS. If the taxpayer fails to respond to the request for a new Form 433-A, the agreement is terminated.
The “installment agreement on specific balance due accounts” is yet another technique for resolving a client’s problems with the Internal Revenue Service. It is extremely useful for clients who cannot convince the IRS to accept an offer in compromise (and the Service rejects the vast majority of offers submitted). However, it is a more tenuous resolution of the client’s situation than discharging the taxes in Chapter 7 or Chapter 13 bankruptcy, or even compromising them with a deferred payment offer, because subsequent changes in the client’s financial circumstances can lead to increases in the monthly payments required. Nevertheless, where no other solution is possible, it is certainly an approach to consider.
See generally IRM 5.8.1 and 5.14.2 (3-30-2002).
For a detailed description of the substantive and procedural requirements for installment agreements, see the author’s article on this subject published in the October-November 1998 issue of The Freestate Accountant.
- IRM 18.104.22.168.
- IRM 22.214.171.124(6) and (8) (03-30-2002).
- IRM 126.96.36.199(9) and (10) (03-30-2002).
- IRM 188.8.131.52.(13) et seq. (03-30-2002).
Since this procedure has been around for only two years, some Service employees may be unfamiliar with it, and you may need to take the initiative and suggest this technique to the Revenue Officer or Appeals Officer handling your client’s case.